Private credit jobs are now a better bet than private equity
Ludovic Phalippou, a professor of financial economics at the University of Oxford's Said Business School, has long been skeptical about the private equity industry. The returns on offer there are no better than those in public markets, argued Phalippou in a paper published in 2020. The only people who really benefit from its activities are the private equity professionals themselves. - Between 2006 and 2020, Phalippou says that carried interest paid to private equity employees totaled $230bn and that private equity multi-billionaires went from three to 22 globally.
Phalippou dubbed the private equity industry the 'billionaires factory' as a result. Three years later, he's changed his mind. Private equity is struggling; private credit is the best place to pursue inordinate wealth.
"For the next few years, private equity is going to be in trouble," says Phalippou. "As interest rates rise, they will be unable to meet interest payments and will lose control of their portfolio companies."
Phalippou's predictions follow a Bloomberg article earlier this week claiming that even the biggest private equity companies have failed to adequately hedge against rising interest rates. A recent study suggested that interest costs at the median private equity backed company were 43% of Ebitda last year, six times higher than for the median S&P company, and rising.
As rates rise, Phalippou says private equity careers will lose their lustre. "People have been very excited about working in private equity because it combined a few things," he says. "Firstly, it offered the most highly paid jobs for any graduates, and secondly the jobs were exciting - being involved in running a company and turning it around is super-interesting."
The most conspicuous sign of private equity's struggles is SoftBank's Vision Fund. Once one of the most desirable private equity employers in London, it cut 30% of its staff last September and is reportedly cutting another 13% this week. While few other private equity funds are actually cutting jobs (at least not conspicuously), hiring is slowing and headhunters say there's more interest in recruiting for fundraising positions than new investor roles.
While private equity struggles, Phalippou says jobs on the flip side of private markets are on the way up: private credit. As private equity funds find themselves unable to meet debt repayments, private credit funds will come in and buy up the debt. In this way, private equity funds will lose control to private credit funds.
If you possibly can, therefore, now is the time to work in private credit instead.
None of this has gone unnoticed to market participants. Mega funds like Oaktree, Sixth Street, Apollo, Ares, Blackstone have all pushed into the private credit market in recent years and are all raising private credit funds while their private equity investments struggle. Blackstone president Jonathan Gray declared in April that this is a "golden moment" for private credit.
Does this mean private equity jobs are passé? Not at all, says Phalippou. "The private equity industry has grown at the speed of light," he says. These are just teething problems: "They will always find a way to present themselves favourably."
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